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Investors Think Monster Beverage Still Needs an Energy Boost

Find out why investors were disappointed with solid growth in revenue.

Energy drink giant Monster Beverage (NASDAQ:MNST) has been one of the most successful stocks of all time. Yet as any experienced investor knows, strong past performance is no guarantee that a company will continue to produce amazing returns, and often, new challenges hold back growing companies even after they've already enjoyed dramatic success.

Coming into Wednesday's third-quarter financial report, Monster Beverage investors were looking for double-digit percentage gains in sales and earnings. Monster delivered on both fronts, but some of those following the stock were nevertheless disappointed with what the company said. Let's look more closely at Monster Beverage and what its latest report says about its prospects.

Image source: Monster Beverage.

Monster Beverage powers up

Monster Beverage's third-quarter results were encouraging in some ways compared to recent past quarters. Net sales growth accelerated to more than 15%, with $909.5 million in revenue beating the consensus forecast among those following the stock by about $6 million. Net income climbed 14% to $218.7 million, and that produced earnings of $0.38 per share. That fell short of the $0.40 per share that investors were expecting to see, but Monster pointed to distributor termination expenses that would have closed that $0.02 per share gap.

Monster's segments behaved the way that most investors would generally expect. The key Monster Energy drinks segment had the best growth, with sales climbing 17% from year-ago levels. The sales of energy drink brands acquired from Coca-Cola (NYSE:KO) saw more sluggish sales growth of 6%, and still represents less than 10% of the company's overall revenue. Products from the acquired American Fruits & Flavors business saw revenue declines during the quarter, and their influence on Monster's overall performance is insignificant, making up less than 1% of total sales.

Monster's international popularity continued to grow. Net sales outside the U.S. jumped 36% from year-ago levels, and the proportion of international revenue is approaching 30%. On the expense side of the equation, distributor termination expenses played the biggest role in weighing down operating income, although a rise in selling expenses also held back profit growth.

Case volumes were extremely strong. Monster sold 96.2 million cases during the quarter, up by more than 13 million cases from the year-ago quarter. Average sale price of $9.40 per case was down $0.05 from the third quarter of 2016 but still supported substantial overall revenue growth.

What's ahead for Monster Beverage?

CEO Rodney Sacks was happy with the way that Monster Beverage has made progress. "During the third quarter, we successfully transitioned Nicaragua and Vietnam to Coca-Cola bottlers and commenced distribution of Monster Energy in Georgia, Kuwait, and Taiwan," Sacks said. The CEO noted that the overall strategic alignment of distribution to take advantage of the Coca-Cola partnership has been going well.

Monster is more optimistic about its future prospects. In October, the company launched Monster Energy products in several smaller countries, and it expects a relaunch in India in the near future. With the release of Espresso Monster and NOS Nitro Mango in the U.S., Monster is paying attention to all of its markets, and Sachs sees further product launches coming in 2018.

Yet investors in Monster Beverage weren't impressed by the rebound in top-line growth rates, and the stock sank almost 5% in after-hours trading following the announcement. At this point, valuations on the stock are high enough that even solid performance likely won't be enough to satisfy many shareholders. Until the company demonstrates further progress in using the Coca-Cola relationship to maximum effect, Monster Beverage could fall short of its full potential to grow.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage. The Motley Fool has a disclosure policy.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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